Bank of America (NYSE: BAC) revealed in a regulatory filing that its legal costs could be up to $2.3 billion above what has been reserved. This represents the worst-case scenario that the bank could face. In its last quarterly earnings report, it predicted a maximum of $1.6 billion in legal losses, but has had to raise that figure by $700 million.
Legal fees were cumbersome on last quarter's results and ate into profits entirely leaving the company with a net loss of $8.8 billion. A settlement over shoddy investments in mortgage-backed securities made by Countrywide Financial which was acquired by Bank of America in 2008 cost the company $8.5 billion last quarter. Beneficiaries of the amount included BlackRock Inc. and MetLife. This amount will also include $100 million to settle plaintiff's legal fees.
In an attempt to try and put the worst of their legal woes behind them, Bank of America is in discussion to offer borrowers a reduction in their principal owed in exchange for protection against legal claims against the bank. Certain conditions would apply in order for borrowers to be eligible, like a principal amount of $1milion or less. In addition, loans owned by Freddie Mac and Fannie Mae could not apply for a principal reduction.
Industry peer Wells Fargo (WFC) downgraded its rating on its own sector from Outperform to Market Weight. The company cited "weaker-than-expected U.S. economic growth, mortgage plague and?regulation concerns" as major factors behind the downgrade.
Wells Fargo analysts also cut their rating on Bank of America to Market Perform. Again, mortgage related litigation and the bank's massive exposure to the ailing U.S. economy were major reasons stated for the rating downgrade.
For now legal worries are just another obstacle to Bank of America in an already downbeat macro scenario. Low prevailing interest rates and declining trading revenues are already causing enough of damage with legal issues just adding to the pressure.
In hindsight, the Countrywide Financial acquisition was probably the biggest misstep the company has ever taken, and it will be eager to put those concerns behind them as soon as possible. As these events unfold, it is Bank of America's stock that is being punished most severely. The stock has tumbled to a new 52-week low in today's trading. Investors will be hoping that the company's latest efforts to shield itself from further litigation are fruitful so that its stock can make its much awaited turnaround.
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